A blog about economics, finance, business and corporate governance. My background is in economics, with degrees from Columbia and Johns Hopkins. A career in international development, equity capital markets and as a corporate finance chief and board member lead me to think about events in a different way--hence the blog's name.

Friday, October 18, 2013

IBM CEO's Email: Lots More in Common With HP

When we compared the quarterly results of HP and IBM exactly one year ago, we noted,

"The reports of both companies show how difficult it is to consistently generate above GDP revenue growth, ex-currency, in this tepid recovery, now almost three years old, from the financial crisis."

In their most recent earnings call, HP CEO Meg Whitman noted the importance of having a team with the right people, in the right place and with the right attitude. Yesterday, IBM CEO Virginia Rometty announced a reconstitution of the growth markets team at IBM, tasking sales leader Bruno DiLeo "...to reassemble the team that used to run the growth markets unit, and he will take over responsibility for running the group. Under Mr. Di Leo, IBM's growth markets unit saw a strong run, often generating double-digit revenue growth. The unit was established under Di Leo in 2008 and he ran it until early 2012." In passing, I would say that reconstituting a sales team from a few years ago isn't automatically a winning strategy. Five years ago, they may have been the right players in the right place; some of being in the right place at the right time is just LUCK. They may have been average players entering the business at the inflection of the down cycle, riding the upswing. If they have the right attitude, it has to be that the wind is now in their faces, but they know that they can prevail. Let's hope the move bears fruit. Mr. DiLeo's name was mentioned by the IBM CFO in his responses to a question in this week's earnings conference call. He previewed the culture of performance remarks today when he noted IBM's substantially reduced quarterly incentive payments. So, really despite the brave face the CFO put on at the beginning of yesterday's conference call, he had to know that it really was a disappointing quarter, with poor execution.Going back to the 2015 Road Map slides, we see that from the 2010 baseline, the company projects top line revenue growth of about 5%, made up of 2% growth in the core company, excluding divestitures; about 1% from shifting to smaller, but faster growing businesses; and, 2% revenue growth contribution from acquisitions. Now, two years from the End of the Road, revenue growth looks really problematical. Bouncing to HP CEO Meg Whitman's continued reference to "GDP like" growth rates, we see that theme in the IBM Road Map projections. The IBM core businesses are projected to grow at about 3%, composed of 2% organic and a 1% benefit from mix. Maybe this is the face of our mature technology companies for a while. Can it be true?Looking at the at least $20 non-GAAP EPS in $2015, the revenue growth shortfall over the past six quarters compromises both the revenue contribution, but it has a greater effect on the enterprise productivity and on the margin mix contribution. The contribution from share repurchases in the most recent quarter was a higher contribution than the assumed average from 2010-2015. That can reverse, to be sure, but the "execution." a.k.a. revenue growth has to turn around. The Road Map assumes, on average, 11% a year in constant currency growth contribution from IBM's "growth markets," which means non-North America and developed Europe. It won't be easy.Looking back at the whole market this week, it raises a point that appears at the head of this blog post. Technicians used to say that a healthy market "climbs a wall of worry." This far into our so-called, economic recovery, organic revenue growth has been lacking across the board for seasoned, large public companies, no matter what the sector.

IBM third quarter revenue of $23.7 billion is down 2% in constant currency;

Industrial bellwether G.E.'s revenue of $35.7 billion down 1.5%.

Goldman Sachs reports revenue of $6.7 billion, down 20% yr/yr;

Wells Fargo revenues decline 3.5%, yr/yr;

JP Morgan Chase revenues decline 8.1% yr/yr;

There has been some good news as from Google and eBay, but the latter sports a high relative multiple. The market seems to be trading as a bet on Washington histrionics, but investors' companies seem to be reporting challenging environments across their markets. European stocks have been touted by lots of money managers and have been bought extensively, despite issues shoved under the rug at the big banks and top line challenges at the larger European non-financial companies. I don't know what it all means, but it certainly doesn't feel like an environment for hitting new highs, but there it is.